Financial Freedom SG

Yesterday, the French team crashed out of the 2010 World Cup. This is a team that went all the way to the finals in the 2006 World Cup and lost to the Italians in a penalty shoot out. In 1998, the French were champions.

So what happened?

If you have out of the world skill, you are supposed to be able to do well in games of skill. Like football, golf and many sports. The French have it in abundance. But they did not even deserve to be there at the World Cup in the first place as they won their place due to a disputed goal that resulted from a handball that the linesman or referee did not spot.

Is skill as important for an investor? Or is there such a thing? After all there is the matter of the Efficient Market Hypothesis by the finance professors.

If we believe the finance professors, the stock market is supposed to be efficient and the prices of the stock reflects all the available information about the companies and their prospects. So there is no advantage to be gained and stock picking and analysis are all futile efforts.

I read a quotation from a book about what Warren Buffett has to say about this:

“I’d be a bum on the street with a tin cup if the markets were always efficient.

Investing in a market where people believe in efficiency is like playing bridge with someone who has been told it doesn’t do any good to look at the cards.”

It would mean that at the height of the mortgage boom in 2006, all the prices reflected the information available to all investors.

However, there were very astute investors who made billions from information available to them at the time. With a big dose of courage or foolishness, these investors found ways to bet against all the people packaging sub-prime mortgages. Read about Michael Burry who made a big pile of money from astute analysis from an article in Vanity Fair if you have not read it yet.

And there is Warren Buffett, George Soros, Peter Lynch, John Templeton, Anthony Bolton, Bill Miller and others like them,

So investment does need an element of skill and at times it is inefficient and this is reflected in prices that do not always reflect the fair value of a stock.

But skill on its own is not enough. You need courage, patience, discipline and luck.

So the French had the skills, but I think they lacked a truly world class coach, were not disciplined, became too complacent and took their opponents lightly.

Football is not easy, neither is investment.

Sources:

1. Betting on the Blind Side by Vanity Fair- a long article with 8 pages, but one you should read to find out about a man who won big during the crisis

2. Photo by Shine 2010 at Flickr